In my last post I described the advantages of for-profit models over nonprofit models, including scalable revenue, incentives and metrics to drive effectiveness and efficiency, and incentives to fund high-risk, high-reward experiments.

But not everything can be for-profit. How can nonprofit organizations get some of these advantages? Here are five ideas:

  • Nonprofits that generate revenue primarily through products & services, rather than through charitable donations, gain some of the advantages of for-profits: they survive only to the extent that they can deliver a product to the market that people are willing to buy, out-compete alternatives, and keep their costs below their prices. To the extent that a nonprofit’s paid services are subsidized by donations (as is the case with universities, museums, and opera houses, among others), this requirement is weakened but not destroyed.
  • In the case of charity, I wonder if the most effective form of it is simply giving money directly to beneficiaries, with the goods and services themselves provided by for-profit businesses. This would seem to let free-market capitalism work to the maximum extent. There is some research to support this idea.
  • If enough people promote the idea of donating based primarily on demonstrated impact, the world might slowly shift towards more strategic nonprofits driven by output metrics and other clear indication of delivered benefits. For instance, when reporting on a contribution from a major donor, the news media could focus more on the impact or potential impact of the contribution, rather than the amount of money given or the percent of their wealth that represents.
  • To drive innovation, perhaps we should be putting more of our resources into prizes or mechanisms like advance market commitments, rather than grants. Tyler Cowen summarizes: “The case for prizes is stronger when you don’t know who is likely to make the breakthrough, you value the final output more than the process, there is an urgency to solutions (talent development is too slow), success is relatively easy to define, and efforts and investments are likely to be undercompensated.” It seems to me that most of those conditions apply to a lot of breakthrough scientific and technological R&D. Indeed, one of the earliest and most famous prizes, the Longitude Prize, had exactly the effect of uncovering an unexpected solution from an unlikely innovator: while most of the scientific community was looking for astronomy-based methods, John Harrison addressed the problem with a highly robust and accurate clock—and he wasn’t even trained as a clockmaker. Why don’t we have more prizes for grand challenge problems today?
  • Beyond this, I think we need more mechanisms to give credit for being right early, for being the first backer of a risky experiment that has transformative effects. Who were the donors who gave small amounts of money to Howard Florey’s lab around 1940 when they were inventing penicillin? The world should know their names. A special award or Hall of Fame could be created for these bold bets (perhaps with a sophisticated scorekeeping mechanism).

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